The bible of investment returns is in. I'm referring, of course, to   "Stocks, Bonds, Bills, and Inflation," the annual book from Ibbotson Associates in Chicago. Ranking in entertainment value between the Statistical Abstract of the United States and the instruction booklet for filling out your form 1040, SBBI is a 'must have' for the investors' library.

This year, after two years of unrequited expectations, we might benefit by studying the pages. Perhaps those endless tables of figures will reveal something.

They do.

A single year, even a losing one, doesn't change the long-term averages very much. When you add 2001 to all the years from 1926 through 2000, the average return for large company stocks was 10.7 percent. That's down from 11.0 percent in 2000 and 11.2 percent in 1999.

The same pages tell us the longer we invest in stocks the more likely we are to make money. Investors lost money in large stocks in 22 of the 76 single years tracked but returns were positive in 65 of the 72 five year periods. They were positive in 65 of the 67 ten year periods. All 62 fifteen-year periods were positive. Ditto, all 57 twenty-year periods.   A losing year or two can disappear without a trace.

Unfortunately, history also delivers some very sobering figures. What the tranquilizing averages don't tell us is that "average" is no guarantee of our personal experience. Our personal experience can be dramatically better, or significantly worse.

And it can be that way for a long time.

Consider the view from 1962, the year I graduated from college. In the preceding ten years (ending in December 1961) the return on large stocks was a stunning 16.43 percent. The fifteen-year return was 16.52 percent. The twenty-year return was 16.86 percent.   Any scan of the post-war period would make you think 16 percent from stocks was a slam-dunk.

Tune your expectations to 10 percent a year and you were being conservative, right?


Over the next 20 years, stocks produced the worst returns since the Great Depression. From 1962 to 1966, large stocks provided an annual return of 5.72 percent. For 10 years it was 7.01 percent. For the fifteen years from 1962 to 1976 the annual return was 6.32 percent. For the twenty-year period ending in 1981 it was a meager 6.76 percent.

During this entire period I don't recall any research saying that we should expect a long period of low returns.

Bottom line: tranquilizing average notwithstanding, what we actually experience over a 20-year period depends entirely on when we start investing.

Which brings us to our current perspective.

The best 20 year investing period in history was 1980 to 1999--- the peak of the Bubble Market. It produced a compound annual return of 17.87 percent. Indeed, 5 of the 8 periods with annualized returns over 15 percent have ended in the last five years.

The View from 1962 and 2002
   1962 2002
Previous 5 years 12.79 percent 10.70 percent
Previous 10 years 16.43 12.93
Previous 15 years 16.52 13.73
Previous 20 years 16.86 15.24
Next 5 years 5.72 Unknown
Next 10 years 7.01 Unknown
Next 15 years 6.32 Unknown
Next 20 years 6.76 Unknown
Source: SBBI, 1926-2001, Ibbotson Associates

Like 1962, the perspective from 2002 shows that stocks offered high returns: 10.7 percent over the preceding 5 years, 12.93 percent over ten years, 13.73 percent over 15 years, and 15.24 percent over 20 years. Based on our experience, an expectation of a 10 percent return would appear conservative.

Should we expect low future returns?

No. We can only predict that returns won't be average.